Please use microeconomics knowledge to answer this question . Please clearly lab

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Question 9 (15 marks). Consider the following diagram for a firm where K is the amount of capital input and L is the amount of labour input. Socos lsoquant: Q-100 K2 L1 2 (a) Compare the slope of isoquant curve at the input bundle (L2, K2) and the slope of the isocost curve. Indicate the marginal products and the input prices that govern these slopes. Explain. (5 marks) (b) Use the last-dollar rule to explain how the input bundle (L2, K2) is not optimal for the firm to employ and produce 100 units of output. (10 marks)

Explanation / Answer

A) the slope of isoquant curve at the input bundle  (L2 , K2 ) is less than the the slope of isoquant curve at the input bundle  (L1, K1) because there is more labour at the combination of  (L2 , K2 ) so marginal product of labour will be less as compare to bundle  (L1, K1) and cost will me more at bundle (L2 , K2 ). so firm choose that bundle at which slope of iso-cost line is equal to slope of isoquant curve. i.e MRTS=MPL / MPK = WAGE/RENT. so, marginal product is more at combination (L1 , K1) and relative price will be less at combination (L1, K1) as compare to bundle (L2 , K2 ).

B) (L2 , K2 ) is not optimal for the firm to employ and produce 100 units of output because at this combination of input cost of the firm will be more. firm can minimize their cost by choosing combination of capital and labour at which slope of iso-cost line is equal to slope of isoquant curve.

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